2.03.

01

A contractual relationship is a legal relationship between two or more parties evidenced

by a contract
Required Elements
o Intention to create legal relations
If you have signed a contract for business-related activities , then you will
be able to sue the other party if they do not fulfil the contractual provisions
(which also means they can sue you if you dont fulfil it)
Subject to contract- means that the document is not a contract and that
all of the contents are bound by a subsequent contract. Also means that the
party can withdraw from the negotiation any time before the contract in
concluded
without prejudice- means that anything in the document is not legally
binding
o
Offer
Expression of readiness to do something
Can lead to a contract
Ex: a company tells you that they will sell 100 boxes of red wine at the
price of $100,000
If no time limit is specified
Offer is valid until the offerer revokes or cancels it
The one who offered cannot take silence as a form of acceptance.
Ex: if I dont hear back from you in ten days, then I assume that
you have accepted and will pay for the product
Invitation to treat
Invited others make offers
Ex: displaying goods on the shelves of a shop, advertising goods or
services in newspapers or televisions
o Acceptance
No contract unless the offer is accepted by the offeree
Made orally or in writing
If method of acceptance is not specified by the offeror
Postal rule-contacts is formed at the time of posting the letter of
acceptance, even if the letter gets lost in the mail
Receipt rule- when sent by fax, the acceptance is valid when the
message is received, regardless if the person reads the fax
o also applies to email
counter-offer
Conditional or partial acceptance

Person only accepts some of the terms and proposes some new
terms
o Means that the person is not accepting the offer, but is
making a new offer to the other party
o Consideration (benefit given to the other party)
Detriment to the person who made the promise or benefit conferred on the
other party
Money, goods, and services are the most common forms of consideration
Promise of a gift is not forceable in law
o Capacity (authority or ability to make contracts)
Minors (people under 18) and lunatics (mentally disordered or intoxicated)
do not have the capacity to enter into contracts
Exception- when they enter into a contract for necessaries (goods
or services that are suitable to the condition of life of a minor and
to the minors actual requirements at the time of the sale and
delivery, such as food and clothes)
o If they fail to pay, they can be sued by the seller
2.03.02

Types of contracts
o Bilateral
Makes up the majority of the contracts drafted
Consists of two parties who are under an obligation to do something or
refrain from doing something
Ex: contract for the sale of goods- the buyer promises to purchase the
product, while seller promises to supply the product
o Unilateral
Less common
Only one of the parties is obligated to do/refrain from doing something
Ex: reward contract-the person who offers promises to pay a sum of
money for information, the person who collects the money was never
obligated to do something
o Void Contract
Not a valid contract
Ex: a contract where the subject of the contract itself is illegal
o Voidable
A valid contract that may be voided by one of the parties
Ex: contract made with a minor since a minor cannot be obligated to
contract in most jurisdictions
o Executory
Contract that has yet to be performed or executed
Some jurisdictions require that only one party has to have
continuing obligations

Ex: installment contracts for the purchase of a home or vehicle

Oral
Valid contracts that are not in writing
Ex: P1 promises P2 that he will buy her a fridge is she gives him her tv
instead and shakes on it
Someone witnesses it
P1 keeps a receipt from the store he purchased the fridge from

2.03.03

Who can avoid a contract

o Minor
Minor can only avoid a contract during their minority status and for a
reasonable time after that
Contract becomes ratified and unavoidable when they pass the reasonable
time after they reach majority
Parents arent held liable for contracts made by the minor
Unless they are a co-signer on the contract
Ex: Helen (17) bought a motorcycle and persuaded the dealer to sell it on
credit, the dealer thought that she was 22 because she showed the dealer
an ID card that was falsely stated her age, she drove the motorcycle and
damaged it a few days later, she returned the motorcycle and said that she
would avoid the contract because she was a minor. In a state that follows
the common law rule, the damage and the fact that she misrepresented her
age doesnt prevent her from avoiding the contract. Some states can hold
the misrepresentation and make her pay the damage, but still avoid the
contract. A few states wont let her avoid the contracts because she lied
about her age.
o Person who lacks contractual capacity
Mentally incompetent
Can be the result of a mental illness, excessive use of drugs or alcohol, a
stroke, etc.
They lack the capacity to understand that a contract is being made or the
general nature of the contract
Can avoid the contract in the same manner as a minor
If they later become competent, then they can ratify or avoid the contract
at that time

2.03.04

How contracts can be invalidated or violated

o How it becomes void
The terms of the agreement are illegal or against public privacy
A party was not of sound mind while signing the agreement

 A party was under the age of consent

The terms are impossible
The contract restricts the rights of a party
o How it becomes voidable
A party was coerced or threatened into signing the agreement
A party was under the influence
A party is not of sound of mind or mentally competent
Terms of the contract were breached
Mutual mistakes on behalf of both parties
The contract is fraudulent (falsifying facts/information or omitting)
Ex: a minor signs a lease agreement with a landlord
o Breach of contract
A party breaks a promise and the other party can sue for breach of contract
Has to be able to prove that the other party harmed them in some way
(known as damages)
Covers money lost and can include time lost as well
Can also be ordered to pay punitive damages (punishment for
breaking the contract)
3.01.01

Forming a Sole Proprietorship

o A one-person business that doesnt have to be registered within the state in order
to exist
More than 22.6 million sole proprietorships in the U.S in 2008
o Most common and easiest to set up
Most businesses start this way
o You can always migrate it to an LLC or a corporation
o You do not have to take any legal or formal steps at the federal, state, or local
level
o You may need to register your business or obtain business and or occupancy
licenses
You can contact the nearest SBDC (small business development center)
for step-by-step instructions
o A key component is to write a business plan to help you focus
Choose a name
Pick a domain name- for website even if you dont want a website
immediately, you can reserve the name
Register your name- required to and it prevents someone else from
using the same name in your area
o If you operate the business under your name, you can skip
this step
Trademark it- gives you legal protection for a business name

o Not mandatory but important if your name becomes a

brand
Financial structure
You must separate your personal finances from the business
Helps if you get a business bank account (used only to deposit
business income and pay business expenses), business credit card,
business recordkeeping
Paying taxes
You must file an annual return with the IRS to report your business
income and expenses (use Schedule C or C-EZ, which is part of
Form 1040)
If you have no employees, the business can operate under your SS#
Once you hire staff or set up a retirement plan, you must get a
federal employer identification number from the IRS
Potential Drawbacks
As a sole proprietor, you are held personally liable for all businessrelated obligations
o If your business fails to pay suppliers, pay a loan, or loses a
suit in court, then creditors can go after your personal
possessions
Many businesses incorporate LLC, which offers
personal liability protection
If the corporation or LLC fails you, then you can
still likely keep our personal property and house
o Obtain insurance
Property and liability coverage
Auto insurance- tell your insurance company if you
use your personal car for business to extend
protection
Health Coverage
Disability- will pay you if you cant work

Partnerships
o Very similar to sole proprietorship
o Business operated by two or more partners
o No federal regulation that governs how they are formed
o Each state has its own rules
o All partners contribute capital and are fully liable for business debts
o Each partner pays taxes separately
Info about income and expenses if filed for the partnership as a whole
How to form a partnership in Kansas
o Choose a partnership name
A partnership ma use the surnames of the individual partners or use a
fictitious business name

Check government databases to make sure that you dont run into federal
trademark law protections or common law
File a trade name as a trademark
If the business name is different from the surnames of the partners, then
you are not required to register a trade name
You may use a trade name as long as it does not violate the trademark
rights of another business
Consider registering your business name as a trademark to protect your
name
Draft/Sign a partnership agreement
Not a mandatory legal requirement for establishing a partnership, but very
important
Helps insure that there will be no misunderstandings between partners
Things that should be covered in an agreement: how to resolve disputes,
how to admit new partners, partners authority and management duties,
allocation of profits, losses, and draws.
Obtain licenses, permits, and zoning clearance
May need to obtain business or professional licenses depending on the
type of business activity you are engaged in
Obtain a EIN
Employer identification number
Required by the IRS for tax reporting purposes

3.01.02

Process of alerting everyone who does business with you and your partners that the
partnership is ending and that each partner will no longer be responsible for the
debts/liabilities of the others
Can be dissolved at any time by any of the partners and does not require that all partners
agree about it
Usually, the one who wants to dissolve it is responsible for telling the customers and
clients
Events that might trigger it (automatically happens)
o One of the partner dies
o When one of the partners files for bankruptcy
o Something happens that makes the partnership illegal
o Retirement of a partner or a dispute between partners
o If a business has enough growth, they will dissolve the partnership and become a
corporation
Steps to take
o Notify state and federal tax authorities
o Turn in a dissolution and liquidation form to the state in which you do business
o Notify all creditors that the partners are no longer responsible for the debts of the
others

o Notify all suppliers, customers, and clients

3.01.03

Limited partnership vs. general

o Limited
requires a partnership agreement
has both limited and general partners
limited partner (does not have total responsibility for the debts of the
partnership)
the most they can lose is their own investment
they have a lack of management control
they do not have the authority to run the business
more or less, they are an investor
o General
Authority to run the business
Control over day-to-day management
Can make legally binding business decisions
Subject to unlimited personal liability for the debts of the business
Doesnt have a limit on their personal responsibility of the debts of the
business (the person could lose their investment in the business and
personal assets)
Each partner is jointly and severably liable
If a creditor cant get what is owed by one of the partners, then one
of the other partners has to pay his share even if they already paid
their own
If sued and one partner doesnt have the money, then the other
partners have to pay

3.02.01
1. Choose a Corporate Name
a. Must contain the word association, company, foundation, institute, society, Corp.,
union, etc. something that lets people know that you are a corporation
b. Must be recognizably different from other business entities names
c. You can reserve a name for 120 for $30-35
2. Prepare and file articles of incorporation
a. Must file an Article of Incorporations
i. name and address of corporate and agent for service of process, the tax
closing month, the nature of the business, number of shares the
corporation is authorized to issue, name and address of each incorporator
and board of directors, duration of the corporate, and effective date of the
articles
1. fee is $90
3. appoint a registered agent

4.

a. must have an agent for service of process

i. individual/corporation that agrees to accept legal papers on behalf of the
corporation if it is sued
ii. must have a physical street address in Kansas
Set up a corporate records book
a. Corporations important papers, minutes of director and shareholder meeting,
stock, certificates, and stock certificate stubs
b. Keep at the principal office of your corporation
Corporate Bylaws
a. Internal corporate document that sets out basic ground rules for operating a
corporation
b. Not filed with the state
Initial Corporate Directors
a. Person who signed the articles ( incorporator) appoints someone who will serve
on the board until the first meeting of shareholders
Issue stock
a. Not required, by small corporations usually issue paper stock certificates
b. Share of stock is classified as a security under state and federal securities laws
that regulate the offer and sale of corporate stock
Kansas annual report requirements
a. Must file and annual report with the Secretary of State every year
b. Must be filed by the 15th day of the fourth month following the end of the
corporations tax year
Other tax and regulatory requirements
a. EIN- employer identification number
b. Business licenses may need to obtain other local and state business licenses
based on type of business and location

5.

6.
7.

8.

9.

3.02.02

Board of Directors
o A group of individuals who are in charge of running the corporation
o Also called a board of trustees (for a non-profit), board of governors, or executive
board
o President/CEO selects the board of directors
Should be selected for their ability to help move the corporation forward
and provide oversight and guidance
o Duties
Set by the corporate bylaws and state laws
Primary duty is to care for the finances and legal requirements
Set the mission and vision of the corporation
Set policy for corporate officers and employees to follow
The do not participate in day-to-day operations of the company
o Liability and corporate board members
They have several types of liability

Must act on behalf of the shareholders and they cannot co-mingle

corporate and personal funds
A lot of board agree on a conflict of interest policy
States that board members cannot let personal interests influence
their decisions on behalf of the corporation/shareholders
Can buy officer and board member liability insurance
Protects the corporation against lawsuits against board members
and to prevent board members from being sued personally
o Compensation
Some corporations compensate their board members
Based on type and size of corporation
Many corps. Dont compensate but they provide reimbursement for travel
expenses to board meetings and other corp. locations
Can be compensated with stock options
o Annual meeting
One of the most important legal requirements
Includes annual report of the state of the corporation
o Removing a member
Have term limits
Personal intervention and dismissal
Corporation Officers
o President/Chairman of the Board
Responsible for the overall functioning of the board of directors
Makes sure that there is an agenda planned for every board
meeting
Presides over meetings
Serves as supervisor/liaison with corporate executives reporting to
the board
Primary spokesperson for the organization
Signs specific documents on behalf of the BOD and corp
o Vice President
No specific duties but can fill in for the president if required
o Treasurer
Primary responsibility for the financial well-being of the corporation but
does not take day-to-day responsibility
Creates and maintains corporations annual budget for each
financial year
o Includes presenting the budget to the board for approval
Creating, implementing, and reviewing financial policies
Reviewing investment activities
Overseeing the annual financial audit of the corporation ( if public)
o Secretary

Overall responsibility to create and maintain corporate records and other

important documents
Record minutes of all board meetings and committees
Keeps record of all policies approved by the board
Maintain a calendar of corporate events (including date of annual
meeting and budget approval dates)
Maintain personnel and payroll records for executive employees
reporting directly to the board of directors
Keeping all records in a safe place and make sure all documents
are in good order in case of audits

Shareholders
o Owners of a company
o Not responsible for the day-to-day management of a companys business or its
affairs
o Right to vote at meetings of shareholders on certain decisions about running the
corporation
Changes to a companys constitution, approval of major transactions,
authorizing dividends

3.02.03

Advantages
o Additional capital can be raised easily through stock markets
o Transfer of ownership is easy
o Only the owners contribution is at stake during liquidation, instead of their
personal assets
o Business doesnt die when its owners die (shareholders)
Disadvantages
o Complex process
o Double taxation ( they get a flat rate tax and then the dividends paid to the
shareholders is taxed)
o Cost of running a corporation

3.02.04

C corporation
o Standard corporation
o A separate legal entity owned by shareholders
o Good for someone who wants:
Venture financing for financing
Flexible profit-sharing among owners
To own real estate
Easily sell your business
Offer stock options to employees

Your earning to stay in the business so that it can grow

S Corporation
o Standard corporation that has a special tax status with the IRS
o No tax is paid at the corporate level
Advantage of benefits that the corporate business types holds, but has an
advantage of pass-through taxation
Low risk of IRS audit
Flexibility to set salaries for employee/owners to minimize Social Security
and Medicare taxes
LLC
o Alternative to corporations and partnerships b combining the corporate advantage
of limited liability protection with the partnership advantage of pass-through
taxation
If your company anticipates losses for at least two years
Want to own real estate
Minimize ongoing formalities (annual meetings of shareholders and
directors)

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"The Difference Between a Partnership and a Limited Partnership - AllLaw.com." AllLaw.com.
N.p., n.d. Web. 08 Dec. 2016.
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Ken LaMance, LegalMatch Law Library Managing Editor and Attorney at Law. "Dissolving a
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Web. 27 Nov. 2016.
"Responsibilities of Corporate Board Officers." The Balance. N.p., n.d. Web. 06 Dec. 2016
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05 Dec. 2016.
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